Gabriela H. Schneider, CMA Northern Alberta Institute of Technology INTERMEDIATE ACCOUNTING Seventh Canadian Edition KIESO, WEYGANDT, WARFIELD, YOUNG, WIECEK Prepared by: Gabriela H. Schneider, CMA Northern Alberta Institute of Technology 2

Stock Compensation Plans—Additional Complications Appendix 17B Stock Compensation Plans—Additional Complications

Learning Objectives Account for stock appreciation rights plans Explain the nature of performance related plans

Compensation Expense Two common plans with unique accounting issues Stock appreciation rights plans Affords the right to receive compensation equal to share appreciation Performance-type plans Where compensation not based on share appreciation Criteria normally based on corporate performance

Stock Appreciation Rights (SARs) SARs designed to mitigate employee’s cash flow problems in non-qualified plans Employee receives any appreciation in share value Appreciation = Market price at exercise date less a pre-established price Appreciation paid out in cash, shares, or combination

Stock Appreciation Rights (SARs) How is compensation expense measured from date of grant to date of exercise? Percentage approach applied Cost = (current market price - option price) times number of stock appreciation rights outstanding Cost allocated over the service period Problem occurs when exercise date goes beyond service period

SARs – Final Notes Compensation expense adjusted whenever stock price changes Change is reported in subsequent periods, or when exercised, whichever comes first Cumulative compensation expense can never have a negative value

Stock Appreciation Rights (SARs) - Example Given: SAR program established: January 1, 2004 SAR exercise period: any time during next five years Pre-established price per SAR: $10 Number of SARs granted: 10,000 Market prices of the stock: Dec 31, 04: $ 13; Dec 31, 05: $17; Dec 31, 06: $ 15 Service period: 2 years (2004 - 2005) The SARs are held for 3 years, then exercised Determine the compensation expense for 2004, 2005, and 2006

Stock Appreciation Rights (SARs) - Example Date Cumulative Percentage Comp. Expense Dec 31st Compensation Accrued based on Recognized for Recognizable Service Period the current year 2004 10,000 * ($13-$10) 50% $30,000 / 2 = $ 30,000 = $15,000 2005 10,000 * ($17-$10) 100% $ 70,000 - $15,000 = $ 70,000 = $55,000 2006 10,000 * ($15-$10) 100% * $ 50,000 - $70,000 = $ 50,000 = ($20,000) *Exercise date occurs before rights expiry date, final adjustment required in 2006 Journal Entries

Stock Appreciation Rights (SARs) - Entries Debit Credit Dec 31, 2004 Compensation Expense 15,000 Liability under SARs 15,000 Dec 31, 2005 Compensation Expense 55,000 Liability under SARs 55,000 Dec 31, 2006 Liability under SARs 20,000 Compensation Expense 20,000 Dec 31, 2006 Liability under SARs 50,000 Cash 50,000 (SARs exercised end of the third year)

Stock Appreciation Rights (SARs) - Example Market Price Compensation Expense 12/31/04 12/31/05 12/31/06 $ The recorded cost of compensation is directly linked to the market performance of the stock, not executive performance

Performance-Type Plans Designed to separate market behavior from executive performance measurement Examples of performance measurement criteria might include: ROA or ROE EPS growth Measurement date is the date of exercise Compensation cost allocated to periods involved using the percentage approach

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